What is a generic Escrow?
In traditional transactions, both the parties (payee and the payer)
are always concerned about foul play or mistrust. The payer is usually
concerned about the products/services they will receive and payee for
money being received. To fix this, an escrow is a financial
arrangement where a third party is responsible for regulating and
payment of funds which is required for multiple parties involved in a
given transaction. The third-party involved only release the funds
when all terms of the contract are respected. It helps in the
transaction being more secure as the funds are kept in an escrow
account which is managed by the
Also, it adds an extra level of trust both parties have for the
Escrow so chances of foul play are less.
There are certain obligations that need to be fulfilled before a payment is released and in case the terms of the contract are not respected a dispute can be raised.
Escrow technology takes care of your transaction without fraud or risk of losing money. It is always better to trust Escrow than making a handshake deal which can result in foul play afterward.
How Escrow Financial Transaction Works?
A trustless process for smooth flow of transactions
Initially, either the payee or the payer approaches Escrow which acts as an arbitrator, the terms and conditions should be agreed upon before the transaction is started.
- The buyer puts the payment to escrow to purchase a product or service.
- Then, the seller ships the product or the service to the buyer.
- If everything works well, the buyer releases the funds to the seller. If not, a dispute can be created and the arbitrator will solve it.
What is an Escrow Smart Contract?
Can you see the future with those contracts?
A smart contract is a program that is smart enough to execute a piece
of code instructions when conditions are met. Also, smart contracts do
not require any third-party control and run solely on the basis of
pre-programmed logic which is overseen by a distributed, decentralized
network of computers that runs on blockchain.
It is a computer protocol that is used to digitally and
automatically facilitate, verify, and enforce the terms of a contract.
The main benefit of the Escrow smart contract is to reduce the
dependency of intermediates, centralized arbitrators to help reduce
The program automatically validates a condition and determines whether an asset will go to one person or back to the person who sent it. It is interesting to know that during the process, the distributed ledger can also store and make a copy of the document which provides added security and immutability.
Main Advantages of using Escrow Smart Contracts
When the transactions has a low-price and high security, it is here to stay
Smart Contract ruling enforcement
Smart contracts are
enforced the same way as normal programs are done. Smart contracts
are similar to real-world contracts but not exactly. In the real
world, if a contract is broken you can take the person to court but
in the case of smart contracts, there are predefined rules that are
defined by parties and enforced by the blockchain. It’s smart
Arbitration Decentralized (reduce conflict interest) with Kleros /Aragon:
The arbitration is decentralized and if any conflict of interest arises, it is being dealt with Kleros, a Decentralized Autonomous Organization (DAO) to solve disputes.
Interoperable (switching arbitrator)
Escrow smart contracts are Interoperable that means if you don’t trust the arbitrator you can easily change the arbitrator, being said the smart contract follows the arbitrator standard. It allows a decentralized arbitrator to easily switch from one arbitration service to another one. Or to allow their users to choose themselves their arbitration services.
The service is resilient and is here to stay. In other words, the service is always up. With an escrow smart contract, you can be sure that your fund is never lost because it uses blockchain protocol with high availability.
Less Arbitration fees (if the gas is affordable :p)
Smart contracts act as a less expensive way of doing business between two or more parties. In case of any dispute, you just have to pay the arbitration fee. Decentralized arbitrators like Kleros is affordable as decentralized arbitration mixed with crowd sourcing is less expensive. In the case of winning a dispute, you don’t pay the arbitration fee but just gas fees used for transaction.
Use cases where an Escrow plays a major role
Let us see how Recover functions in few easy steps:
- The finder finds your lost valuable.
- The honest finder will definitely return your valuable, but the dishonest person (who is not willing to not return the product) on seeing the reward capped higher than the market price is incentivized to return it to the owner.
- When the item is returned the finder gets the reward.
- If not, a dispute is created which is handled by the arbitrator.
2. Hiring Freelancers
Escrow can work tremendously well when it comes to hiring freelancers for a project. The money is sent to an Escrow and is only released when the expected work is delivered within the time.
Escrow financial agreement not only helps make the transaction secure
but also adds more trust among two parties.
On the other hand, Escrow smart contracts provide advantages like smart contract enforcement, interoperability, resilience, and better cost to name a few.
Moreover, the Smart contract can also be secured with Kleros dispute resolution which helps the transaction being more secure.
The Recover Loser box comes with all the advantages of escrow smart contracts with easy implementation to make sure your valuable is returned, the next time you lose it.
Now that we have learned briefly how blockchain escrow works, let us discover Recover.